by Andrew Gillen
A blog posting over at "Economists for Obama" caught my eye. It concludes, that a new tuition tax credit would mainly affect enrollment, and that "the effect of the credit on tuition would be small."
Given the assumptions made, the analysis is correct. However, the assumptions are incorrect.
(I apologize in advance for the econ jargon) It assumes that the supply curve is elastic because "schools can always squeeze in a few extra students." While I don't doubt that any given school could squeeze in a few more students, a "few more" is not enough to make the supply curve elastic. In fact, in the short term, schools run into capacity constraints quickly, and in the long term, there are significant barriers to entry (i.e. start-up costs, accreditation) and it is not in many of their interests to expand enrollments (see the section "Why Subsidies for Higher Education Do Not Have the Same Effect as Other Subsidies" in our study on the Tuition Bubble for a detailed explanation).
What this means is that the supply curve is inelastic, not elastic. This is consistent with the findings of a new NBER paper by Susan Dynarski and Judith E. Scott-Clayton which finds "little compelling evidence" that increases in student aid are effective in increasing enrollment.
Bottom line: The graph they show with the correct supply curve (inelastic instead of elastic) would indicate that it would be primarily tuition, not enrollments, that would go up.
HT: Mark Thoma